Sage shares plummet despite strong first half

The higher a share price climbs, the more sensitive it will be to any perceived underperformance. Just ask Sage Group (SGE), which saw its stock tumble as much as 14 per cent on the morning of its (seemingly healthy) interim results. 

In addition to earnings progress, the company’s statutory operating profit margin grew by more than 4 percentage points to 18.7 per cent. Thanks to further growth in subscription revenue, underlying cash flow from operations was £322mn – up from £266mn in the same period a year earlier. This put underlying cash conversion at an impressive 127 per cent. So why are investors feeling so bearish?

It’s partly a case of inflated expectations. The group said it expects organic total revenue growth for the full year to be “broadly in line with the first half”. According to analysts at Peel Hunt, the city’s consensus was closer to 10 per cent – implying a small downgrade. But when a share price has climbed more than 30 per cent in the past year, as Sage’s has, investors are bound to be hyper-aware of signs that momentum is slowing. 

Elsewhere, there are concerns about the company’s ability to defend its share of an increasingly crowded market. “Sage competes against a variety of large, well-funded competitors – many of which have more revenue, are adding more [annualised recurring revenue] and are still growing faster on a percentage basis,” Panmure Gordon’s analysts said in February. 

Interim figures showed that growth in the US is moderating, as is global growth of the group’s cloud-native solutions. Leverage was also up slightly in the first half, with the net debt to Ebitda multiple up to 1.4 times from 1.3 in the same period in 2023. This is still comfortably within the group’s one to two times medium-term target range, so there’s no immediate cause for concern.

As in recent quarters, investors must continue to ask themselves whether Sage’s progress is priced into its shares. It currently trades on a consensus price/earnings multiple of more than 30 times, meaning it’s fairly expensive (even for the tech world). Microsoft (US:MSFT), the undisputed global leader in enterprise software, currently trades on 36 times forward earnings. 

Although we remain impressed with management’s modernisation of the business, we think some of the shine may be coming off the stock as competitive threats increase. An earnings beat this year could yet turn things around, but we’ll move to hold for the time being.

Last IC view: Buy, 1,139p, 22 November 2023